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Economics Chapter - 8 Class 12th ( Short Run Equilibrium Output)

  Chapter --- 8 ( Short Run Equilibrium Output)



 Equilibrium  Output -  It refer to that level of output where aggregate demand is equal to aggregate supply is known as  equilibrium output. 

AS = AD Approach

When AS = AD Corresponding to full employment is known as  equilibrium in economy.

AD = AS
C+ S = C + I
S = I

Assumptions -

❋ Keynes assumed that there is close economy.
❋ It is applied during the short period . 
❋AS is assumed to be perfectly elastic. 

Aggregate demand - It is the sum total of expenditure by an economy during an accounting year . It has two Components:- C + I

Consumption (C) :- It has positive relation with the income. 

As Consumption rises ,income also rises
As Consumption falls,,income also falls.

Investment ( I ) :- It is assumed to be autonomous . It remains constant . It does not change with the change in income.

Aggregate Supply (AS) :- It refers to the sum total of production by an economy during an accounting year . 
AS is perfectly elastic. It adjusts itself according to AD. 

Equilibrium Of AS& AD :-


X - axis shows the income and Y - axis shows AD.

 Point "E"  is the equilibrium point when AS = AD .

When AS >AD  Supply of goods and services is more compared to demand.  Therefore, the stock of the producers would remains  unsold . So producers will produce less goods and AS becomes equal to AD. 

When AS< AD , demand of goods and services is more than the supply . Therefore the producer will suffer the unfulfilled demand of the consumers. So producer will produce more and AS will becomes equal to AD . 

 S= I Approach :- 

 According to S= I  approach , when saving is equal to investment,  then this situation is called equilibrium.

 S refer to leakage because it discourage the production activity in the economy.

 I refer to leakage because it promotes the production activity in the economy.
 AS= AD
 C+ I = C+ S
 S= I

Assumptions :-

 1.) It is applied during short period of time.
 2.) AS is perfectly elastic.
 3.) Investment is autonomous.
 4.) Economy is assumed to be close economy.
Saving :- It refers to the part of incomes which we does not Consumes.
It has the Positive relation with Y.
Initially S is negative, then it is zero and then it is positive. 

Investment:- It is assumed to be autonomous.It remains constant.

                           Equilibrium of S = I 

      _
S = s + (1-b)y
   = -20 + 0.5 X 100
   = -20+50
   = 30

X- axis shows income and Y-axis shows saving. At initial level saving is negative because income is zero at the same level .Saving will be zero because consumption and Income are equal.At the end of the point saving is positive because income is more than the consumption.

When S > I , more saving  means less investment . It leads to less income and it leads to less saving.So, saving will become equal to investment.

When S < I, less saving means more investment.It leads to more income and it leads to more saving. So Saving will became equal to Investment.

     INVESTMENT  MULTIPLIER

Multiplier (K) :- It refers to the ratio between change in Income due to change in Investment.
                         K = ∆Y/∆I
                               Where ∆Y = Change in Income
                                           ∆I  = Change in Investment
                        


Change in investment,leads to Change in income It leads to change in Consumption .
We known that the expenditure on consumption of one person is the income of other person.So it increases the income which is turn increases the investment . This Process continues till ∆C = ∆S.

    Relation of K with Marginal propensity to Consume - 

 K has positive relation with M.P.C.because consumption of one person increases the income of other  person.

       

              Relation of K with Marginal Property to save

K has negative relation with M.P.C.because saving of one person decreases the income of other person.


Maximum value of Multiplier

 Maximum value of K =  ∞
 When MPC =1

For Example - ∆Y = 100, ∆C = 100
     MPC = ∆C  = 100 = 1
                 ∆Y      100 
 K  =      1      =       1      =
        1 - MPC      1 - 1        0
   K  =   ∞

Minimum value of Multiplier

 Minimum value of K = 1
 When MPC = 0
 For Example - ∆Y =100,∆C = 0 
       MPC = ∆C  =   0   = 0
                    ∆Y     100 
 K  =      1      =       1      =   
        1 - MPC      1 - 0        1
  K  =  1

Forward Action and Backward Action of Multiplies:- 

 Multiplier action  is forward when there is a multiple increase in income caused by an increase in investment.



 Multiplies actions background when there is a multiple decreases in income caused by decrease in investment.



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